What’s Happening to Total Rewards? New Landscape

The current global economic environment means executives are thinking about reward program management in new ways, says consultant Tom McMullen. The good news is that Hay Group studies show human capital concerns rank number one.

What’s the Deal with the ‘Regular Rate’?

FThe bad news is that many organizations still find it hard to maintain an effective rewards system.

McMullen is Reward Practice Leader for Hay Group in Chicago. He was joined by Dow Scott, professor of Human Resources in the Quinlan School of Business Administration at Loyola University Chicago and president of Performance Development International, a management consulting firm. Their remarks came at the WorldatWork conference in Philadelphia.

What Is the C-suite Concerned About?

Here are the dominant C-suite reward-related themes, according to McMullen:

• Optimizing productivity and cost effectiveness
• Improving employee engagement
• Developing and retaining key talent
• Improving performance management processes
• Aligning human capital and reward systems to business strategy

Major Challenges with Reward Practices Today

McMullen finds the following common challenges for employers that are trying to implement meaningful reward strategies:

• Strategy and design
• There’s little input from employees on reward strategy and design.
• Awards often are not aligned with strategy.
• There is often an extreme focus on benchmarking and little concern given to affordability of pay programs.
• Reward components are managed in isolation of each other.
• Implementation
• Performance management processes are often weak (it’s hard to separate out top performers).
• The value and intent of “total rewards” are not understood by employees.
• Line managers are not well engaged in reward implementation.
• Little is done in terms of reward ROI assessment.

2013 Reward Next Practices Survey

To find out how companies are meeting these challenges, WorldatWork conducted a survey in early 2013 of 303 senior reward professionals to identify key characteristics of reward strategies and programs.

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Is Reward a Cost or an Investment?

The survey asked whether the organization regularly measures the ROI on its reward investment. Eleven percent of respondents said this is a current focus, and 48% said it will get greater focus in the future.

It’s an important question, McMullen says, because of this:

If pay is a cost, the obvious goal is to minimize it.
If pay is an investment, the obvious goal is to optimize it.

If reward is viewed as an investment, organizations focus on:

• Aligning rewards with its business and human capital strategy
• Balancing employee and organization reward interests
• Reinforcing the link between rewards and performance
• Distilling down and sustaining key reward communications
• Leveraging senior leaders, managers, and employees in reward implementation

Core Reward Strategy Objectives

There is an increased emphasis on the motivational value of reward programs, says McMullen. As the survey table shows, employers will focus on the motivational value in the future.

Reward program is … ▼	% saying this is a current focus	% saying this will be a greater focus in future
Externally competitive	64%	53%
Internally fair	75%	41%
Motivational	39%	67%
Reasonable in cost	74%	47%

Reward Strategy Trends

McMullen sees the following trends affecting reward strategy:

FROM		TO
Externally competitive	►	Motivational
Inconsistent strategy and design	►	Consistent strategy and design
Short-term performance orientation	►	Longer-term performance orientation
Financial performance measures	►	Balanced performance measures
Cost orientation of reward	►	ROI orientation of reward

Core Compensation Program Effectiveness

The survey shows an across-the-board focus on increasing compensation effectiveness, says Scott.

Rewards Program Segment ▼	% saying this is a current focus	% saying this will be a greater focus in future
Base cash/wage programs	74%	44%
Short-term variable pay programs	47%	56%
Long-term variable pay programs	34%	42%
Financial recognition programs	32%	38%
Total Remuneration (i.e., mix of fixed, variable, and benefits)	62%	61%

Compensation Process Effectiveness

Survey participants indicated that performance management is the primary focus in the future, Scott says.

Compensation Process▼	% saying this is a current focus	% saying this will be a greater focus in future
Market pricing processes	62%	50%
Job leveling/grading processes	51%	53%
Performance management processes	41%	69%

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Nonfinancial Reward Program Effectiveness

Career development opportunities will be a primary focus in the future for many survey participants, says McMullen.

Nonfinancial Reward                  ▼	% saying this is a current focus	% saying this will be a greater focus in future
Education and training programs	50%	54%
Career/development opportunities	39%	63%
Flexible work arrangements	50%	32%
Nonfinancial recognition	38%	43%
Work climate/culture	57%	48%
Work/life balance	48%	38%
Meaningful job design	37%	31%

Reward Design Trends

McMullen sees the following design trends for rewards programs:

FROM		TO
Base pay program management	►	Variable pay program management
Paying for jobs/work	►	Focus on paying for value/contribution
Flexible work arrangements	►	Career development, culture, recognition
Defined benefit plans	►	Defined contribution plans
Siloed reward element orientation	►	Total remuneration / rewards orientation

In tomorrow’s Advisor, more on compensation design from McMullen and Scott, plus good news about an upcoming webinar that shows how to build a talent pool to make hiring A-level talent easier.